Operations management
Operations management covers how the firm transforms inputs into goods and services: production type, capacity, productivity, costs, quality and inventory. PAU tasks are usually numerical - break-even, productivity, or a simple inventory decision - plus a short justification question.
Production and productivity
- Process types: job shop (unit/custom), batch, mass or line, continuous. The choice follows volume, variety and standardisation.
- Productivity = output / input. Labour productivity = units / hours worked; total factor productivity = output / value of all inputs. Always state the unit (units per hour, € per €).
- Economies of scale reduce unit cost as output grows; diseconomies appear through coordination and control problems.
Costs and break-even
- Fixed costs (FC) do not vary with quantity; variable costs (VC) do. Total cost = FC + v·Q.
- Unit contribution margin = p − v. Break-even quantity Q* = FC / (p − v); break-even revenue = Q*·p.
- Margin of safety = (actual Q − Q*)/actual Q, expressed as a percentage.
Worked example
A workshop has fixed costs of €60,000 a year, variable cost €30 per unit and a price of €50. Q* = 60,000 / (50 − 30) = 3,000 units. At sales of 4,500 units the margin of safety is (4,500 − 3,000)/4,500 = 33.3%. Now a machine adds €12,000 to fixed costs but cuts variable cost to €26: Q* = 72,000 / 24 = 3,000 units, so break-even is unchanged, yet every unit above 3,000 now earns €24 instead of €20. The investment therefore pays off above 3,000 units; showing this comparison is what earns the reasoning marks.
Quality, inventory and lean
- Quality costs: prevention, appraisal, internal failure, external failure - failure costs are the expensive ones.
- Economic order quantity (Wilson model) balances ordering cost against holding cost; just-in-time reduces stock but raises dependence on suppliers.
- Lean thinking eliminates waste: overproduction, waiting, transport, over-processing, inventory, motion and defects.
Traps
- Dividing by the wrong base in productivity (hours versus workers versus euros).
- Folding fixed costs into variable cost when a quantity is given.
- Reporting break-even units as euros without multiplying by price.
- Treating the break-even point as the profit-maximising output.
- Describing JIT as "zero stock" rather than minimum stock with reliable suppliers.